July Is the Month of Inalienable Rights: Life, Liberty and Payment When Due

This time of year, one is often reminded that certain rights are inalienable. For bondholders, the right to receive payment of principal and interest at a stated maturity date is one of those inalienable rights protected by the Trust Indenture Act (the "TIA") requirement that all affected bondholders, and not just a simple majority, need to approve modifications to payment terms. A July 1, 2010 decision by the United States District Court for the District of Kansas, YRC Worldwide, Inc. v. Deutsche Bank Trust Company Americas, Case No. 10-02106 (D. Kan. filed Feb. 25, 2010), confirms that a bondholder's inalienable right to payment extends to non-contingent "put rights."

YRC Worldwide, Inc. ("YRCW" or the "Company") is one of the world's largest transportation services providers, perhaps best known for its Yellow and Roadway branded trucks. In late 2009, as part of a comprehensive restructuring, YRCW closed a debt-for-equity exchange offer that resulted in the conversion of approximately $540 million of bond debt into equity. Multiple series of bonds participated in the debt-for-equity exchange: 8.5% Guaranteed Notes due 2010 (the "8.5% Notes"), 5.0% Net Share Settled Contingent Convertible Senior Notes due 2023 (the "5.0% Notes"), and 3.375% Net Share Settled Contingent Convertible Senior Notes due 2023 (the "3.375% Notes" and, together with the 5.0% Notes, the "Contingent Convertible Notes"). As part of the exchange offer process, the Company required that participating holders of the Contingent Convertible Notes approve indenture modifications which, among other things, eliminated existing "put rights." The put rights give holders of the Contingent Convertible Notes the right to compel YRCW to purchase their bonds at par value on certain dates prior to the stated maturity date, with the earliest put date for the 5.0% Notes occurring in August of this year. Just over 91% of the holders of the 5.0% Notes and nearly 99% of the 3.375% Notes elected to participate in the exchange, leaving approximately $20.1 million of the 5.0% Notes and $1.6 million of the 3.375% Notes outstanding.

Despite the fact that more than 90% of the bondholders in each series of the Contingent Convertible Notes approved the amendments as part of their participation in the debt-for-equity exchange, Deutsche Bank Trust Company Americas as Trustee (the "Trustee") for the Contingent Convertible Notes refused to execute the supplemental indentures eliminating the put rights of the remaining bondholders, asserting that the amendments were inappropriate given the terms of the original indentures and section 3.16(b) of the TIA which require approval by all affected bondholders, not just a simple majority, in order to eliminate or modify payment rights. The Trustee argued that unconditional put rights constituted a protected right to payment on a stated maturity date. In February of this year, YRCW filed a lawsuit seeking a declaratory judgment that the Trustee was obligated to sign the amended indentures.

Deciding cross-motions for summary judgment, the court held that the terms of the indentures and TIA § 316(b) both prohibit deletion of the put rights without consent of all affected bondholders. In particular, the court held that TIA § 316(b) applies because the put rights are non-contingent and provide a right to payment on certain specified dates. In the court's own words, the put dates "are 'due dates' within the meaning of TIA § 316(b)." YRCW had attempted to characterize the put rights as providing only a conditional right to payment and as being contingent on the holders' elections and compliance with notice and delivery requirements, and cited McMahan & Co. v. Wherehouse Entertainment, Inc., 859 F.Supp. 743 (S.D.N.Y 1994) in support of its argument that TIA § 316(b) does not apply. However, McMahan involved put rights which could only be exercised upon the occurrence of a triggering event – a merger that was not approved by a majority of independent directors. In contrast, the YRCW put rights are not contingent on the occurrence of a triggering event and can be exercised on certain specified dates. Incidentally, the court also held the terms of the indentures and TIA § 316(b) do not require approval by all affected bondholders in order to eliminate a provision in the indentures that bars YRCW from merging or selling substantially all of its assets unless the surviving entity assumes YRCW's obligations under the notes and indentures. 

In terms of an immediate effect for YRCW, the decision means that YRCW may have one month to procure as much as $20.1 million to purchase bonds from holders of the 5.0% Notes that choose to exercise their put rights on the first put date. YRCW has publicly stated that it is currently uncertain whether it will have sufficient cash or will be able to obtain financing in order to satisfy the payment date. It will be interesting to see if YRCW files an appeal of the district court decision, and, if so, whether it will seek a stay pending appeal. 

In a broader sense, the decision affirms the rights of bondholders provided for under the indenture and the TIA regarding the right to payment. An exchange offer as part of a larger restructuring can amend, or eliminate completely, certain provisions of an indenture including financial covenants. Other provisions, which by the terms of the indenture and the TIA require the consent of each affected holder cannot be circumvented by the Company upon only the consent of exchanging bondholders. While exchanging bondholders can agree on their own behalf, they cannot modify the inalienable rights of other non-consenting holders.